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Why Video Game Store GameStop Has Shaken Wall Street

2021-01-29T01:34:32.407Z


Will the stock market change after these irruptions of small investors? What is Robinhood and what has been its role in all this? This is a guide to understand what is happening and what this earthquake means for the stock market.


In the networks and financial district of Wall Street there is talk of GameStop, a chain of video game stores whose shares are rising far beyond what most people think they are worth.

They are currently trading for more than $ 300, an astronomical 1,600% rise, compared to the $ 6 for which they were trading at one point last year.

The brutal increase, which

is putting in check some investors who bet on a bad future for the company

, was driven by a kind of Internet campaign on the digital forum Reddit.

Other companies that were in financial trouble, such as

Nokia, BlackBerry, and even BlockBuster

(the latter a bankrupt firm) are other companies with short-sale stocks that record unusual highs in an increase in the volume of their operations, with 35%, 45% and 180% growth, respectively.

Analysts think the rise is one way ordinary citizens are taking revenge on the powerful on Wall Street, who "have treated the stock market as their own personal casino" to the detriment of the less powerful.

The issue (and its consequences for ordinary investors) is complex to understand.

That's why we present you with a question and answer guide to unravel why and what this GameStop frenzy means for the stock market.

Why is everyone talking about GameStop?

The simplest answer is that its share price has skyrocketed, about 8,000% in six months.

The more complex answer is that its stocks have become the centerpiece in a fight for financial power between Melvin Capital, an investment management company, and a group of amateur internet traders.

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Mike Novogratz, an investor and former hedge fund manager, noted that online activity is the result of frustration that domestic investors are often excluded from lucrative opportunities, such as the initial public offering of shares.

"What you feel is that the [stock market] game is against the little ones," he said.

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What is GameStop?

GameStop is a chain of video game stores and other electronic stores.

Like most retailers that still sell products in person, they have struggled lately as video game sales have shifted to the online market and restrictions caused by the coronavirus pandemic, which keep people away from stores. .

They still operate, but few people believe they will come back.

How did it end in the middle of all this?

Like many companies that are in trouble, GameStop was the subject of what is called a short sale, in which professional investors borrow shares to sell and then buy them back to be able to return them, allowing them to make a profit if the price of shares go down.

Instead of buying low and selling high, they sell high and buy low, making a profit on the change in the asset's price.

They are basically bets that the company will fail.

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GameStop was one of the most shorted publicly traded companies.

Other companies on the list include the AMC Theaters chain of cinemas, the Bed Bath & Beyond home goods chain, and even the nearly-defunct American video store franchise Blockbuster.

Remember these names.

A woman walks past a GameStop in a Pennsylvania mall this week.SOPA Images / LightRocket via Gett / SOPA Images / LightRocket via Gett

What is short selling?

For the most part, investors follow the "buy low, sell high" format when it comes to stocks.

Short sellers do the opposite: they borrow and sell a stock when it is high and bet it will continue to fall

.

If that doesn't happen and the share price goes up, short sellers are forced to hedge their positions or buy more shares to minimize their losses.

Because short sellers, often hedge funds, are essentially betting against the success of a business, it can be a risky position.

Any positive news or enthusiasm for the stock will raise the stock's valuation, minimizing the gains for the short seller.

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In GameStop's case, online trading forum users stimulated interest in buying stocks, which drove the price up, which in turn sparked more interest.

Speculative trading left short sellers with no more stocks to buy to hedge their positions, creating a small contraction and leaving them with millions of dollars in stocks that they had bought at a high price but then had to unload at an even higher price. .

S3 Partners, a financial data company, noted Wednesday that short sellers had lost $ 23.6 billion on GameStop this month.

How does the internet fit into all of this?

The internet has been used to forecast stocks for decades, but there has never been such a thing as the Reddit community called r / wallstreetbets, also known as WSB.

WSB takes a somewhat extreme investment approach.

Their motto is "How 4chan Found a Bloomberg Terminal", alluding to the fringe message board and Bloomberg computer system that is almost ubiquitous in finance.

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Hobbyist investors in WSB have argued about GameStop (referred to by its stock market abbreviation, GME) for years, but things turned around earlier this year.

As the stock price rose, more WSB posters went up.



"100% of my portfolio in GME because of you idiots," posted a person on January 10.

On Wednesday, the people who run WSB temporarily took the community private, citing "unprecedented technical difficulties as a result of the new interest in WSB."

What is Robinhood and what has been its role?

There's also Robinhood, the app that is WSB's chosen unofficial stock trading platform.

It allows people to buy stocks and make investments, for little or no charge.

It is a free app that is key in this phenomenon of the rise in shares, as it has been identified as the main platform that allowed users of the Reddit group to make a massive purchase of GameStop shares and trigger the historic rise in the value of the company's shares.

It is among the most downloaded on the App Store in the United States.

But despite the fact that it gained unexpected popularity in recent days and was even installed in the most demanded applications worldwide, those responsible for the platform said that

"in light of recent volatility" they would

 restrict the transactions of certain companies. 

In practice, this implied a blocking of the option to buy shares of GameStop, BlackBerry, AMC and Nokia through this service.

The move did not sit well with small investors.

What happens if a group of people buy GameStop shares?

This is where things get a bit complicated and a bit more confusing.

GameStop shares rose on January 11 after it appointed three people to its board of directors as part of a deal with shareholders who had been calling for a change.

That prompted some short sellers to abandon their positions, helping the stock rally higher in the following days.

That only emboldened WSB traders.

"IT CAN'T STOP, IT WILL NOT STOP GAMESTOP," wrote one person on January 14, along with a clip from the movie

The Wolf of Wall Street

.

The shares traded at par for the next few days.

Things really started to change as of Friday.

What happened on Friday?

CNBC data reveals that the volume of shares traded, an indicator of activity, soared on Friday.

Increased volume may indicate a small contraction, meaning that people who had bet against the stocks chose or were forced to give up and take losses.

And while WSB had garnered media attention in recent days for its GameStop push, a boom in coverage from GameStop and WSB helped bring financial history to the streets.

The frenzy was on.

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GameStop shares would go from trading around $ 43 (already significantly more than it was at the beginning of the year) to $ 380, making it one of the most traded stocks on the market at the time.

Tesla Chief Executive Elon Musk, the world's richest person, who has also publicly denounced short sellers, tweeted Tuesday: "Gamestonk!"

with a link to WSB.

Gamestonk is a reference to GameStop and

stonk

, internet slang for the word stocks.

Is this important to ordinary investors?

Yes. On the one hand, the trading volume has put the IT infrastructure of online brokerages to the test, including TD Ameritrade, which on Wednesday reported that its mobile app was handling record volumes.

And at least on paper, ordinary investors are making money even if they aren't paying attention.

BlackRock, which operates mutual funds, may have made billions of dollars just from the rise of GameStop shares.

But the biggest and most lasting impact may be on how the market itself operates.

Never before has a bunch of amateur investors taken over a hedge fund like this and won.

The battle for GameStop has taken on a kind of David vs. Goliath sentiment, and some outsiders paint it as a reckoning with Wall Street.

"For years, the same hedge funds, private equity firms and wealthy investors dismayed by GameStop's operations have treated the stock market as their own personal casino, while everyone else pays the price," said Senator Elizabeth Warren , Democrat of Massachusetts.

in a press release.

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"It's about time the Securities and Exchange Commission (SEC) and other financial regulators wake up and do their job, and with a new Administration and Democrats at the helm of Congress, I intend to make sure they do. "

Or, as Reddit co-founder Alexis Ohanian put it on Twitter, the movement with GameStop is "the public doing what they feel institutions have done to them."

"And it's a perfect storm at a time when so many people are hurting, interest rates are so low, inescapable student loan debt looms, and every major institution has suffered losses in the past year during the global pandemic." he claimed.

How different will the market be after this?

There is some belief that WSB signals the arrival of a powerful new force as large numbers of retail investors have joined forces.

That can serve as a check or balance on other important forces, such as hedge funds, which are used to putting their full weight without ordinary investors swaying the price.

"WallStreetBets is one of the top 20 hedge funds in the world with 2.9 million followers under management at a cost of $ 6,200 each and there is no boring research report in sight," financial analyst Genevieve Roch-Decter sarcastically stated in Twitter

What is the downside?

Should I be concerned about the market?

That's a hard question.

At the moment, speculation activity is found only in a few companies, which is not that uncommon.

But concern arises when so-called retail investors - hobby investors who buy stocks for their personal gain - become too exuberant and inflate stock prices, sometimes borrowing to buy stocks.

And some skeptics point to the situation around GameStop and other companies as evidence that the stock market has reached a dangerous level of excitement and speculation.

Massachusetts regulator William Galvin compared the situation on Wednesday to the 1999 tech stock bubble. "The current pandemic has created a unique situation where many people who have engaged in day-to-day trading have no idea what they are doing. doing, "he told CNBC.

"They think they are missing out if they don't make a bet," he added.

How will this end?

Often times when this happens, the price falls back to where it was before the stock market earthquake started.

In 2008, when Volkswagen was in the midst of a tug of war between traders, it briefly became the highest valued company on the stock market, but its price eventually stabilized.

History suggests that no stock can go up forever and, over time, stock prices generally reflect the expected future earnings of corporations.

A GameStop store in Des Plaines, Illinois on October 15, 2020.AP Photo / Nam Y. Huh

But these plays can be prolonged if the actors involved have enough resources to risk.

Tesla, for example, would need 1,600 years of earnings to justify its current price-to-earnings ratio, according to a calculation this month.

GameStop shares can move about 20% a day through March if options trading is any indication, Barron's reported.

Is someone going to put an end to it?

There is no evidence that any of this is illegal, although Nasdaq CEO Adena Friedman has indicated that stock exchanges and regulators should heed the potential of social media-fueled schemes.

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Reddit did not respond to questions Wednesday about whether it is in contact with regulators, but said it prohibits posting illegal content or facilitating illegal transactions.

"We will review and cooperate with investigations or as necessary," they said.

Galvin said he believed federal regulators would take action.

White House press secretary Jen Psaki said Wednesday that the Biden Administration's economic team was "monitoring the situation."

Why are they also talking about the actions of the AMC Theaters chain of cinemas?

Remember we mentioned AMC Theaters as one of the companies that has been the target of short sellers?

WSB and other amateur investors go after such short positions, hoping to induce a similar effect.

AMC shares rose 265% on Wednesday.

And the excitement was still spreading to other well-known consumer brands.

Shares in homeware chain Bed Bath & Beyond rose 176% from the beginning of the year on Wednesday, while confectionery maker Tootsie Roll Industries rose 41% from January 1.

With information from NBC News

Source: telemundo

All news articles on 2021-01-29

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